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Retirement 101: Having a plan

Most people spend more time arranging vacations than planning for their retirement. In a Money Talk Video, Tom Pappenfus explains how having a plan helps investors define and strive for their objectives. 

Joel Dresang: Tom, the Labor Department has figured out that fewer than half of Americans have calculated what they need to save for retirement. I think everybody understands that you need commitment and you need money. How important is it to have a plan?

Tom Pappenfus: A plan is very important to help you define what you’re investing for. It helps give you an end goal and a direction on how to get there. It also provides some context for budgeting yourself along the way.

Joel: So, say my wife and I come into you, and say we’re looking to figure out what it takes for us to retire. Walk me through the steps. How do you start us off?

Tom: I generally start with kind of some open-ended questions just to find out what does retirement look like for you? How does that compare to your lifestyle now? So that I can have a better understanding of what that goal might look like and how to help you get there.

Even if you don’t have a plan, it’s important to save for retirement. People will often ask me how much they should be putting away. And you want to first look to some of those resources that are available to you to fund your retirement. Your employer may offer an employer-sponsored retirement plan. And at a very minimum, if they offer a match, you want to be at least taking full advantage of that match.

Joel: And then there are ways to catch up when you get older too, right?

Tom: Yes at the age of 50, the IRS has allowed what they call “catch-up” contributions, recognizing the fact that you’re now closer to retirement. They too want to make sure that you can meet those goals as well. So you’re allowed to put more money towards your retirement plan.

Joel: What about debt? How do I balance paying off loans and setting aside money for retirement?

Tom: I get that question a lot. “What should I be doing first? Should I be paying off my debt, or should I be putting money towards my retirement account?” You want to first look at what the interests rates are on the debt that you’re currently paying versus what you might be able to expect, as far as return are concerned, from your investments. And whichever may be higher is generally where you want to direct your funds.

So right now, we have historically low interests rates, which means debt is fairly cheap. I would definitely be recommending to people that you put money towards investments.

But, ideally you won’t be having as much debt in retirement, if any debt at all.

Joel: So, say my wife and I figured out what that number is, how much we need to live on in retirement. What then?

Tom: So, once you come up with that desired retirement income that you have, let’s say it’s $50,000. You’ll then want to first estimate what your known income flows might look like, and I’m referring to Social Security and any pension payments. Let’s say, for instance, it might be $24,000, and then you subtract that from your desired income in retirement, and that difference is what you’ll need to draw from your retirement nest egg.

Joel: So you’re talking about withdrawing like 4%-5% from that nest egg each year to make up that difference.

Tom: Absolutely. So, if it is, let’s say in the example we were just discussing, if we need to make up $26,000, and you would need a nest egg of about $650,000 to generate $26,000 using a 4% withdrawal rule. That’s a general kind of rule of thumb to say that you can safely withdraw 4% and preserve principal over time.

Joel: So, like with most planning, I suppose it’s better to start earlier, but it seems a lot easier to figure all this out the closer you are to retirement.

Tom: It’s always important to start as soon as possible, and then to review that plan systematically, over time, with an advisor.

Tom Pappenfus is an investment advisor at Landaas & Company.

Joel Dresang is vice president-communications at Landaas & Company.

Money Talk Video by Jason Scuglik and Peter May

Learn more
You need a budget, by Tom Pappenfus
Knowing the number, by Brian Kilb
Having the confidence to retire, a Money Talk Video by Art Rothschild
Retirement investing: Where to begin, a Money Talk Video by Kyle Tetting

(initially posted Sept. 26, 2016)

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